InvITs falling below PB Value

Hello! I see a lot of InvITs trading below their book value. Is this a normal occurrence or is there some value to be unlocked here? They also need to be giving great dividends (~15%) which alone is amazing not to mention the capital appreciation that would also be happening.

My theory is that the dividends would hit the stock value as they supposed to give dividends mandatorily, the value of stock would always come down by the portion of the dividend amount.

I’m curious too if there are other realistic reasons .

Remember, INVITS hold depreciating assets so they are not designed to provide capital appreciation. Price might jump in short term due to movement in interest rate, but over long time, Capital appreciation is difficult.
Also, do not get mislead by high dividend yield. This is not dividend in conventional sense, but more like cashflow. Because terminal value of your holding is almost going to be zero, so there is no capital coming back at end of tenure.

Eg. An INVIT that holds Power transmission line, which was built with investment of 1000 crs. This book value is as on day 1, but it keeps on decreasing over the year as asset depreciate. At end of life that asset is almost useless or valued 0.
So cashflow you got over the years should account for dividend as well as 0 terminal value.

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This is the key which explains a PB below 1.

But comparing to REITs, it seems they all seem to have a relatively high PE of 30-60. Meanwhile INVITs are sub 1. They both operate on the same model right? How come one is priced so much differently to another?

How come Real estate is considered appreciating while infrastructure is considered depreciating? Is the value of the REIT all coming from the Land and none from the building infrastructure?

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Learnt something new. Never thought of this in this line. I wonder if this point is mentioned in their brochure for layman investor to understand. Assuming a power transmission line needs to be replaced what will happen to the Invit holder, when the value becomes zero?. In a way the cashflow that is received by an investor represents capital and interest as the Power line will have zero value. Seen many videos on INvit and was tempted to buy as well, but none mentioned this factor.

The risk being someone who do not understand the product in detail, like me till today, will buy when the PB is low assuming I got a good deal and then the Transmission line shuts shop. Goodness. So always buy Invit when it is originally launched and not from the secondary market - is this assumption correct.

Maybe this concept is slightly different with Real Estate Invits as Land will always have some value.

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Hi, genuine question : Wouldn’t the power transmission lines , capacitors, feeders, and any equipment be renewed ? Where’s the value going to 0? I still don’t get it.

Some of the contracts the PGInvIt hold are 28 years or higher. This may or may not involve the Complete renew of the infrastructure but till their contract the updates and maintenance happens.

Also, PGInvIt may also look for new opportunities in rest of the India , place bids , win or lose contracts.

I’m saying PGInvIt as an example only, I was also looking for an InvIt recently as well.

Aren’t ports operate the same way? Adani , JSW and few others take a contract to operate the port shipments for a long duration.

Couple of differences in both models:

  1. As you rightly pointed out land. Most people believe land (and to some extent even buildings) to be appreciating assets. And hence are willing to accept lower cashflow from REIT.
  2. Rental contracts in itself are designed as appreciating contracts with in-built provision of escalations. So if rent is 100 today, after 3 years it will increase to 110 and so on. Thus
    most REIT have appreciating cashflows. On other hand INVIT have contracts designed in such a way that cashflow reduces over period. So if it is getting 100 as rent for transmission line, it will be 95 after 3 years and so on.
  3. REIT also has additional scope of appreciation through future development potential. Most assets they hold have scope for additional development (adding few floor or 1-2 new building in complex). This gives additional avenue to income growth. This is generally rare for INVIT.

All in all this limits appreciation possibility of INVIT. There is always a possibility that INVIT can buy more assets and grow its cashflow. But on same asset basis, it is difficult for INVIT to grow its cashflow, relative to REIT.
Hence REIT are generally traded at premium (or lower yield) compared to INVIT

Not that pessimistic. :slight_smile:
INVIT is a great product, don’t get me wrong. I personally invest in INVIT heavily. But you need to have your expectations right.

If you are buying an INVIT today which is yielding 11%, you should not be comparing it with bond giving 7% and feel that you are getting 4% extra.
Till the time you understand that 11% today might become, 10 after few years, and 9 after few more, and over a long period of time you will be getting less capital back then what you invested, then it is fantastic.

If you feel I have invested in bond giving me 11% every year, and I will get back my capital, then there is a fundamental problem.

Yes that is the fundamental feature by design. And that is why you are getting 3-4% premium in yield.

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Umm, not really. Typically this power transmission lines (or any capital assets) are designed for 30 years and that is their useful life. Once the contract is over, that asset is useless and yields no cashflow.
You might sell it in scrap and get some residual value, but it will be fraction of actual capital used to build it. So more or less 0 at end of life.

Consider road assets. Govt gives road for toll collection for a fixed period, and after that period, it is returned to govt (or toll collection stop). Once that happens, its value for INVIT is 0. They aren’t getting anything back.
This is what happened with IRB INVIT where couple of their major earning road asset’s, license ended. And that shows up in price.

yes that option is always there, but for that to do, they will have to raise new money from new investors. Remember INVIT does not hold cash on its balance sheet, so any new acquisition requires new capital, diluting existing investors.
Indigrid has been doing this brilliantly. PGINVIT is struggling to do this. And hence if you see, Indigirid is trading at premium to PGINVIT right now.

Point I am making is the asset they hold are depreciating assets and their end of life value tends to zero. So there is no capital coming back, end of life.

There are no listed INVIT yet in this space, so no idea.

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Few points and One question…

For an InvIT to expand by acquiring new Transmission or Power Generation assets, it is not necessary that they have to dilute the equity, they can do that using debt.
PGInvIT intense to do this i.e. expansion by using debt. And they haven’t used their debt capacity.

The problem with PGInvIT is that after introducing the first power transmission infrastructure investment trust government change the policy from BOOM to BOOT for future acquisition of transmission assets. This cause moderate level of problems ine terms of acquisitions.

Also the interest rate scenario in the market is such that it is in the benefit of the current power transmission asset owners like PowerGrid or other players that they securitize the cash flow of their transmission assets instead of seling those assets. PowerGrid is doing this hence the delay in the transfer of remaining 26% in SPVs. I hope this will change if and when the interest rates come down.

@Akash_Shah
Now the question that I have is, who owns the land below the transmission Infra. or Does the transmission company owns it or is that land is under long term lease only?


Also I have many questions about the valuation report… i.e. about rationality
You need to go through the Valuation Report to understand What I am saying.

E.g. The way they Measure Debt Level and Interest Rate (there is no explaination why they choose the value they do choose, at the same time they quote different internal interst rate) and final Cost of Capital. There is lot of missing data or rational behind the numbers they choose in Val Report. They are saying it to be Rs. 85-87/Unit.

Becuase of the flip-flops they are adding accounting gains in some quarters and loss in some others. But these balance sheet entries cause Tax Payment Outgoes (sometimes it saves tax too).

Only upto a limit. PGINVIT has not used its debt capacity, but most other have been using it effectively. So beyond a point, dilution does come into picture

Indigrid is not facing that problem and have been doing acquisition regularly.

No idea

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My question is related to IRB Invit. I am expecting that they are going to add additional highway projects under their portfolio. In that case, can one expect capital appreciation.
Also assuming that no other project is added and all projects expired in 2040, what happens to the shareholder equity, will that be distributed to shareholders?
Surely, I am missing a piece here!

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It also depends on how they fund it. If they raise whole bunch of new equity to acquire new projects, then theoretically that would not raise price much.
On the contrary if they take up more debt on favorable rates, probably small price appreciation might happen.
But then market behaves in weird way, and just the news of acquisition might raise the prices by bit

Well in that case INVIT will close. The return you get in INVIT, part of it is also Capital given back. So till 2040 if they have no plans to buy more projects, they will be returning capital in bits and pieces … and remaining equity might also reach zero by then

makes sense

Your understanding of pginvit is mostly correct. I have designed and constructed transmission lines all my life so I know a thing or two about transmission lines. 400 kV transmission lines are designed for 50 years and 765 kV transmission lines are designed for 150 years. They consist of galvanized steel towers insulators and conductors. They are built to last much longer than their designed life. You can say that transmission lines outlast our life. So to say that their residual value after 30 odd years will be zero will be incorrect. Further their maintenance cost is almost negligible. As for as reduction in revenue is concerned it is correct to say that it will reduce after certain number of years but will stabilize thereafter. So if pginvit adds one or two assets by FY 28, they will manage to pay the current level of dividends

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Yes… The problems in near future are the new BOOT (Build, Own, Operate and Transfer) model adopted by Govt few months after launch of InvIT. AFAIK the current SPVs will be on BOOM basis. But future acquisition will be BOOT instead of BOOM (Build, Own, Operate and Manage).

Also I don’t know why PGInvIT is bidding for newer assets (They are saying in their Earnings Call that they not seeing buying opportunities for operating assets which will be value accretive to current unit holders). And at the same time PowerGrid is not selling their assets, instead they are Securitizing their assets. I think this will continue till Interest Rates are High and PowerGrid acculate many transmission assets and forced to monetize by Govt for their future Working Capital Needs and CAPEX.

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Pginvit is looking for transmission assets from states as its sponsor powergrid has securitized its cash flows instead of selling the assets to invit. Performance of Indigrid invit and trajectory of its unit price performance is instructive. After its launch in 2017 and till the end of 2019, its unit price never exceeded its issue price of Rs 100 but it continued to pay handsome dividends starting with Rs 2.89 per quarter. So guys who got into indigrid invit at around 90 were earning close to 14 percent return on their investment. Now they are earning more than 16 percent as distribution by indigrid invit has increased to Rs 3.75 per quarter or Rs 15 per year. Similar trajectory I am expecting in pginvit

I hope this happens… :grinning:

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Don’t depreciation on their balance sheet take care of this ? Should account for replacement cost of the asset?

For a normal company yes, but not for INVIT.

In simple terms, for normal company, profit is calculated by reducing depreciation as expense. Dividends etc are paid from Profit. So this result in Depreciation getting accumulated in Cashflow, which can be used in future to replace the asset.

For INVIT, profit number are basically useless. They work on principal of Cashflows. And as per regulations, at least 90% of cashflow needs to be paid out to unitholders. (That is why if you check, PGINVIT is paying out more than its net profit)

So no accumulation of cash in INVIT which can be used at later date to replace the asset. So terminal value will be 0 (or very close to zero)

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